The Best Stocks to Gift Your Grandchildren

a grandfather and his granddaughter holding a piggy bank talking about finances

(Image credit: Getty Images)

If you have never given a child shares in a publicly traded company as a holiday present, that's probably just as well. Presents are supposed to be fun. Investing in equities — as remunerative over the long haul as they have proven to be — isn't much fun a lot of the time.

That said, the impulse to give stocks as a gift to a youngster is understandable, even noble. We want children to develop critical life skills around money as early as possible.

The more they learn about saving and investing — to say nothing of compound interest, dividends and the economic cycle — the better. We know how important this will be for them in ways they can't yet imagine.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Stocks even have a singular appealing quality as a gift. They're dynamic. A child can follow a company and its stock. Hopefully, the stock's value will appreciate over time. Perhaps you and your grandchild will bond as you study corporate developments and stock charts together.

A gift that allows the two of you to spend time together, while learning something and maybe even making a little money, too? Sounds lovely.

Just be aware that if your only goal with this gift is to beat the market, you are almost certain to be sorely disappointed. Indeed, it's nearly impossible to beat the market every year, year after year.

Over the past two decades, 94% of all U.S. actively managed domestic equity funds underperformed the S&P Composite 1500, according to Standard & Poor's SPIVA Scorecard. About 85% of all U.S. large-cap funds trailed the S&P 500 over the same time period.

Consider indexing vs buying stocks

The vast majority of full-time professional investors can't beat the market, so why should you?

The simple fact is that most pros can't beat the market because most stocks can't beat the market. Between 1990 and 2020, more than 55% of all U.S. stocks underperformed risk-free one-month U.S. Treasury bills, according to Hendrik Bessembinder, a finance professor at Arizona State University. These stocks didn't just fail to beat the market, they failed to beat cash.

Even more damning, the professor found that the entirety of the $76 trillion in net global stock market wealth created between 1990 and 2020 was generated solely by the top-performing 2.4% of stocks.

Finding winning stocks is like finding needles in haystacks. That's why Vanguard founder and indexing evangelist Jack Bogle always advised clients to "buy the haystack."

So if part of the purpose of giving stocks as a gift is to teach your grandkids about investing, you should probably start by discussing the advantages of indexing. You might also want to let them know about the miracle of compounding. Between the two, passive investors have done quite well for themselves over the years.

If you can achieve an annualized return — also known as a compound annual growth rate — of 7.18%, your initial investment will double every 10 years. Happily for all of us, the S&P 500 has generated an annualized return of at least 7.1% over the past 10, 15, 20 and 30 years — and that's after inflation. The market has basically been doubling our money or better in real terms for decades.

You could explain these facts to your grandchildren as you give them some shares of an S&P 500 ETF, such as the SPDR S&P 500 (SPY) or the Vanguard S&P 500 (VOO). An ETF is probably an even more disappointing present for a kid than stock (or underwear), so it's bound to make an impression. The important part is that the child learns that indexing is generally the best way to go for most retail investors.

The best stocks to buy your grandchildren

If the point of this holiday gift isn't to teach your grandchild about the wonders of indexing, then here are some general guidelines for picking equities.

If you give shares in some company to your grandkids as a gift, they probably don't care about dividend yields or price-to-earnings (P/E) multiples or trailing-12-months levered free cash flow. If you must buy individual stocks as a gift, be sure to invest in high-quality companies your grandchild recognizes and maybe cares about.

High-quality blue chip stocks with fortress-like balance sheets and a decent chance of beating the market over the next, say, five to 10 years, are easy enough to screen for. Have a look at what industry analysts believe are buy-rated blue chips with interesting businesses.

Nvidia (NVDA), Amazon.com (AMZN), Microsoft (MSFT) and Apple (AAPL) are all Buy-rated Dow Jones stocks — and they can be fun (or at least fun-ish) to follow. Walt Disney (DIS) is a Buy-rated Dow stock that likely holds relevance for your grandkid, as is Walmart (WMT).

Wall Street also happens to be bullish on Dow stock McDonald's (MCD) these days. Perhaps your grandchild would like a side of fries with her shares in the Golden Arches?

If you really want to teach your grandkids about investing, start with indexing. If you want to have fun playing around with individual stocks, go ahead. Just know that you're going to have lots of ups and downs.

After all, volatility is the price of admission. If you put $1,000 into Nvidia stock 20 years ago, it would today be worth a small fortune. Take a look at the chipmaker's chart, however, and you'll see that buy-and-holders experienced plenty of sickening drawdowns along the way.

Bottom line: make sure the stocks you gift are somehow relevant to the person receiving them. If you want this present to hold a kid's attention longer than most gifts do, that's the only hope you've got.

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that’s right on the money.

TOPICS

Dan Burrows is Kiplinger's senior investing writer, having joined the publication full time in 2016.

A long-time financial journalist, Dan is a veteran of MarketWatch, CBS MoneyWatch, SmartMoney, InvestorPlace, DailyFinance and other tier 1 national publications. He has written for The Wall Street Journal, Bloomberg and Consumer Reports and his stories have appeared in the New York Daily News, the San Jose Mercury News and Investor's Business Daily, among many other outlets. As a senior writer at AOL's DailyFinance, Dan reported market news from the floor of the New York Stock Exchange.

Once upon a time – before his days as a financial reporter and assistant financial editor at legendary fashion trade paper Women's Wear Daily – Dan worked for Spy magazine, scribbled away at Time Inc. and contributed to Maxim magazine back when lad mags were a thing. He's also written for Esquire magazine's Dubious Achievements Awards.

In his current role at Kiplinger, Dan writes about markets and macroeconomics.

Dan holds a bachelor's degree from Oberlin College and a master's degree from Columbia University.

Disclosure: Dan does not trade individual stocks or securities. He is eternally long the U.S equity market, primarily through tax-advantaged accounts.